While percentages of homes being flipped nationwide are nowhere near their peak reached in 2005 and 2006, in some areas such as California they remain near their historic levels consistent with home price gains in those areas, according to a report released by Trulia on Thursday.
Trulia found that traditional flips—those in which an investor sells soon after buying the house to take advantage of rapidly rising home prices—are higher in markets experiencing higher price gains, and especially high in markets where prices have appreciated by more than 10 percent year-over-year.
The recent hot spots for flipping include California and parts of the South, according to Trulia. Six of the top 10 metro areas where flips represented the highest share of home sales were located in California, two were in Tennessee (Nashville and Knoxville), and Florida (Fort Lauderdale) and Massachusetts (Cambridge-Newton-Framingham) had one each in the top 10.
The two metro areas with the largest share of flips as a percentage of home sales in the third quarter of 2014—San Jose (4.0 percent) and San Francisco (3.8 percent)—experienced year-over-year price gains in Q3 of 11.1 percent and 11.7 percent, respectively. Trulia housing economist Ralph McLaughlin pointed out in the report that all metros with year-over-year home price gains above the high watermark of 10 percent experienced flipping activity between 3 and 4 percent in Q3 2014, which is on par with the average flipping percentage for that level of price appreciation from the years 2000 to 2014.
In an interview with MReport earlier this month, Auction.com EVP Rick Sharga cited price appreciation combined with a lack of inventory as the main drivers of flipping activity in areas where the flipping share is highest.
"One is the fact that the properties are more expensive now, which makes them harder to rent at a profit, because you have fewer potential renters willing to pay higher prices," Sharga said. "The other is that some of these states have a very low inventory of existing homes for sale. So flippers can come in, invest some money in fixing up properties, and sell them pretty quickly at fair market value."
With slower home price growth predicted for 2015 and an ever-declining foreclosure rate in some areas, McLaughlin predicts that these factors will cause traditional flipping activity to taper off somewhat in the coming year.
"Now that home prices are rising more slowly, we’ve passed the point of peak flipping," McLaughlin said. "Traditional flips will become less common as fewer markets have double-digit price gains. Plus, foreclosure flips have gotten rarer now than in 2009 to 2011 because fewer foreclosed homes are available to buy and flip."